The RRSP contribution deadline for 2020 is fast approaching. By March 1, you’ll need to have all of your RRSP contributions made for last year. If you contribute beyond that deadline, the contributions will count toward 2021.
The March RRSP cutoff is a significant tax milestone that many Canadians don’t pay enough attention to. Everybody knows about the April 30th deadline for filing taxes, but comparatively few know about the RRSP cutoff date. Yet the latter arguably has more bearing on your tax bill than the former. If you miss the filing date, you may be charged some minor interest and penalties, but nothing too big. On the other hand, if you’re late on a $10,000 RRSP contribution and have a 50% marginal tax rate, you’ll delay a full $5,000 in tax savings to the next year.
In this article, I’ll explore the RRSP contribution deadline in detail — including the consequences for missing it.
What happens if you miss the deadline?
If you miss the RRSP contribution deadline, your contribution gets rolled over into the next year. So, if you had planned on contributing $10,000 for 2020 and don’t get it in until April, it now counts as a 2021 contribution. Basically, you still get the tax savings. But having it rolled over to the next year could impact your financial planning. For example, if you were hoping to trigger a tax refund that you could invest in the markets, you’ll have to wait another year on that.
Contribution limits
Another thing to keep in mind with RRSP contributions is that you need to contribute within the limit. The amount you can contribute is 18% of earned income, up to a maximum of $27,230 per year. “Earned income” means pre-tax income. So, if your pre-tax salary is $100,000, you should be able to contribute around $18,000.
Some RRSP investments to consider
If you’re making some last-minute RRSP contributions, you might be wondering what to invest in. RRSP contributions do nothing for you if they just sit in cash. You need returns to realize the full tax benefits. With that in mind, the following are two investments you could consider for your RRSP.
Index funds like iShares S&P/TSX 60 Index Fund (TSX: XIU) are always worth looking at. They are essentially pre-built portfolios of stocks that you can buy as if you were buying one stock. They track major market indexes, so you get built-in diversification. In the case of XIU, the index is the TSX 60 — the largest 60 Canadian companies by market cap. This is a relatively low-risk investment of the type that is suitable for retirement savings. It has ample diversification — which reduces unsystematic risk — and is built on large caps, which are less risky than small caps in general. In exchange for this ready-made portfolio, you pay just a 0.18% annual fee.
Second, you could look at bond funds like BMO Mid-Term US Investment Grade Corporate Bond Index ETF (TSX: ZIC). This is another type of index fund, but it’s built on bonds rather than stocks. Bond funds are even less risky than stock funds, because bond interest is legally guaranteed. In exchange for that, you must accept a lower potential return. But such investments can be great for retirees who already have significant savings and can live on interest.
